Exclusive - Poor nations a ray of hope for crisis-weary G20

A child plays in front of an apartment complex in Jakarta October 21, 2011.

Reuters/Supri

LONDON (Reuters) - Simple reforms would eliminate much of the risk of investing in poor countries, unleashing billions of dollars of pent up cash and providing a welcome boost to the world economy, a report to be presented at this week's G20 summit will say.

Tidjane Thiam, charged with pulling together the report, believes world leaders will seize on a plan to spur infrastructure investment in developing countries that includes reform of The World Bank and its regional counterparts but does not tap crisis-weary taxpayers.

"We need growth. We're not going to get out of this by just cutting deficits," the Franco-African engineer who runs Britain's biggest insurer Prudential Plc told Reuters before heading to the Cannes summit.

"At one point it was important to convince everybody we needed to cut deficits and we got there, and now everybody is really thinking 'what's the positive message and how do we get the public out of just thinking about cuts and cuts and cuts?'"

Thiam, a former Ivory Coast planning and development minister, says the G20 High Level Panel for Infrastructure Investment which he chairs has at least part of the answer.

The idea is a simple and symbiotic one.

Rich nations may not be generating much new wealth at the moment but they are sitting on trillions of dollars of accumulated wealth that is earning little in the way of returns and not doing very much to foster a global economic recovery.

"There's no yield in this world, no yield anywhere, and there's not going to be any for quite a while," Thiam said in an interview at his London office last week.

Spending on infrastructure in poorer countries does, however, have a history of generating big returns. It also helps unlock their growth potential, thereby increasing profitability still further and creating a virtuous investment cycle.

Remove a large part of the risk element and you have the recipe for a highly profitable, mutually beneficial relationship between the world's most and least developed economies, Thiam and his fellow panel members believe.

Other members of the 17-member panel, due to publish its report at the summit in the south of France this week, include Sudanese telecoms billionaire Mo Ibrahim, South Africa's Mac Maharaj who was imprisoned on Robben Island with Nelson Mandela, and Nicholas Moore, Chief Executive of Australia's top investment bank Macquarie Group.

Long-term infrastructure investments may not appeal to those looking to make a quick buck, but hiving off the risk should attract those with the serious money, namely the $30 trillion (18.75 trillion pound) global pension industry in which Thiam's company is a major player and Asian or Middle Eastern sovereign wealth funds struggling to find good homes for their cash in a low growth, low interest rate world.

"I understand developing infrastructure in the third world, I've done it, I've built literally thousands of kilometres of roads in Ivory Coast," says Thiam, turning to gaze across the London skyline. "Nowadays at Prudential I am the person in charge of taking people's savings and investing them so that I can pay their pensions in 2030 ... Finally I found a way to reconcile my two passions."

CHINESE APPETITE

Finding new growth areas is a pressing concern for Thiam given the pensions industry is sitting on a ticking demographic time bomb in the west where populations are ageing rapidly and people not saving enough for retirement. As for sovereign wealth funds, long-term returns from infrastructure projects suit their needs perfectly.

"What are the Middle Eastern sovereign wealth funds thinking about every day? 'What do we do when we run out of oil?' So this is exactly what they need," Thiam says.

Yahya Alyahya, a Saudi national and Chief executive of Gulf International Bank, is a fellow member of the panel Thiam is chairing, as is Jin Liqun, Chairman of the Board of Supervisors of China Investment Corporation.

"He (Liqun) has been very, very helpful and very positive. They're desperate to find good investment opportunities that are relatively clean and well-structured," says Thiam.

He points to Brookings Institution research published in August showing that returns on investments in developing countries are "super-normally high" at 30 to 40 percent for telecommunications, 40 percent for electricity generation and 80 percent for roads.

Ensuring potential investments are safe, simple and transparent enough for long-term, relatively risk averse investors will be the main obstacle. The Brookings Institution, whose report urges the G20 to act in this area, describes hurdles to financing as enormous but Thiam believes they can be overcome.

"Big projects have such a bad name in the third world. It's full of white elephants," he says. "You need credible projects, you need something to invest in that people can see and touch and have a view on."

FACEBOOK RETURNS

The way to achieve this, Thiam believes, is to get the World Bank and other regional development banks to move away from the expensive business of funding major projects themselves.

Instead their precious resources should be used to do what fund managers cannot, such as early feasibility studies and design preparation on the basis that $1 dollar invested in preparing projects triggers $10 of investment. It's what he calls "priming the pump."

Secondly, the development banks should provide guarantees to cover losses, giving investors the confidence they need to stump up most of the funds, which Thiam believes is a much better use of development bank balance sheets.

Thiam says he has been in very close dialogue with the World Bank and other development banks around the world and found them to be supportive.

He stresses that he is not against public investment but notes that an estimated $1.2 trillion a year needs to be spent on infrastructure in the developing world, of which about $90 billion is needed in sub-Saharan Africa alone.

The need for private sector investment will become all the more acute as western governments cut back on spending and cash-strapped banks pull down the shutters on project finance.

Much of what Thiam is proposing is not revolutionary. As a cabinet minister in Ivory Coast in the 1990s he lined up investors and the army pension fund to finance projects such as a new toll bridge, a power plant, and refurbishment of Abidjan's airport.

"That was my proudest achievement, convincing international financiers to put private money into an urban toll bridge in Africa," says the 49-year-old.

Infrastructure generally offers great returns, he believes, but the developing world in particular is hard to beat.

"The growth curves are just unbelievable. Anything grows at 20 percent per annum which means it will be 10 times bigger in 10 years. You don't get that in the West unless you are Facebook."

PEACE DIVIDEND

The big change he wants to drive through is to make it safer and easier to invest in poorer nations by institutionalising what is often already being done on a local, project-by-project basis.

One way of spreading risk and improving access would be for development banks, governments and fund managers to create Special Purpose Vehicles (SPVs) grouping together investments in dozens of projects across the world.

"So it's really having a push. Not doing it in one country but doing it in 40, 50, 60 countries at the same time and then using the balance sheets of the development banks, of the World Bank, to provide guarantees of the SPVs."

They might even be something that private investors who want to give their portfolios a philanthropic flavour could invest in.

To help focus minds, Thiam and his panel will ask G20 heads of government to back an initial list of 11 projects worth "a few hundred billions of dollars," spread across Africa, the Middle East, Asia and Latin America, including a transnational highway, hydro electricity and a gas pipeline.

"A lot of these projects need political commitment," says Thiam. "In Asia if something is endorsed by China, India, Indonesia and Singapore, it has more chances of happening."

Thiam, the first black chief executive of a British blue-chip company, also speaks animatedly about the humanitarian and peace dividends of such investment, occasionally bringing himself up short for getting carried away.

Something as simple as a street light, allowing children to gather and do their homework after dark, can be transformational while transport networks help overcome estrangement and the prejudice it breeds.

"As soon as people start moving, what you observe everywhere is that actually they get to know each other and they tend to massacre each other less," says Thiam. "The reality is those projects, they bring countries together. They have to negotiate, they have to sit down. There's no better glue than money."